These 4 Measures Indicate That Jindal Poly Films (NSE:JINDALPOLY) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jindal Poly Films Limited (NSE:JINDALPOLY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jindal Poly Films

What Is Jindal Poly Films's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jindal Poly Films had ₹8.34b of debt in September 2020, down from ₹13.7b, one year before. However, because it has a cash reserve of ₹8.29b, its net debt is less, at about ₹50.3m.

How Healthy Is Jindal Poly Films' Balance Sheet?

The latest balance sheet data shows that Jindal Poly Films had liabilities of ₹7.23b due within a year, and liabilities of ₹13.1b falling due after that. On the other hand, it had cash of ₹8.29b and ₹1.19b worth of receivables due within a year. So it has liabilities totalling ₹10.9b more than its cash and near-term receivables, combined.

Jindal Poly Films has a market capitalization of ₹37.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. But either way, Jindal Poly Films has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Jindal Poly Films has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.0046 and EBIT of 13.6 times the interest expense. So relative to past earnings, the debt load seems trivial. On top of that, Jindal Poly Films grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jindal Poly Films will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Jindal Poly Films created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

The good news is that Jindal Poly Films's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Taking all this data into account, it seems to us that Jindal Poly Films takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Jindal Poly Films you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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